Question

Determine the effects of the following on a cash basis taxpayer’s gross income for 2018 and 2019.

1. On the morning of December 31, 2018, the taxpayer received a $1,500 check from a customer. The taxpayer did not cash the check until January 3, 2019.
2. The same as part (a), except the customer asked the taxpayer not to cash the check until January 3, 2019, after the customer’s salary check could be deposited.
3. The same as part (a), except that the check was not received until after the bank had closed on December 31, 2018.

Answer 1

a. Check is always equivalent to cash if there is no restriction on the encashment of the check. i.e if the recipient of the check is free to encash it , than it is as good as cash received and hence it will increase the income of the recipient.

b. In this case, since there is a restriction by the customer to not to cash it until January 3, 2019 . So, it will not be treated as cash equivalent and hence, will not be included in the taxable income of the taxpayer.

c. The fact that check was received after the bank was closed does not affect the nature of the check and hence, it will be included in the taxpayers income.